Major tax changes are on the way for both individual and business taxpayers. To help clients, prospects, and others understand the changes and how it will impact them, Smith Schafer has provided year-end strategies responding to the tax bill and a summary of the key changes.
Pay 2017 State Income Taxes
The Tax Cuts and Jobs Act limits the deduction for state and local income and real estate tax deductions to a total of $10,000 per year beginning with the 2018 tax year. If the taxpayer is not subject to the alternative minimum tax (AMT) in 2017, paying state income taxes by December 31, 2017 would be beneficial.
Pay 2018 Real Property Taxes
Taxpayers should consider prepaying their 2018 real property taxes by December 31, 2017. The payment is deductible (in states such as Minnesota and Wisconsin) if the lien date has passed and the amount of the tax has been assessed or estimated. If a taxpayer is not subject to AMT and the real property assessment meets the qualifying deduction criteria, paying 2018 real property taxes by December 31, 2017 would be to the taxpayer’s advantage.
Charitable contributions do not have the same AMT limitations as real property taxes and state income taxes. This deduction essentially remains the same in the pending legislation. However, with the increased standard deduction for 2018 and future years, many taxpayers will not receive a tax benefit from charitable contributions made after December 31, 2017. Taxpayers should consider accelerating planned future charitable contributions into 2017. This acceleration may be accomplished by the traditional method of check or credit card payment directly to a charitable organization, or through one of the following methods:
- Stock Gifting. Donating appreciated stock rather than cash enables the taxpayer to receive the fair market value of the stock as a charitable donation without recognizing the appreciation as gain.
- Donor-advised Funds. A donor advised fund established with a public charity enables a donor to contribute cash or property to the fund and take the charitable contribution deduction in the year of donation. Assets of the donor-advised fund may be invested or further donated to public charities at the discretion of the donor. A donor is able to receive a tax benefit of the donation in 2017 and have all or a part of the donations designated to a public charity in 2018 or a future year. Many community foundations and investment companies have established donor advised funds accepting these contributions.
SUMMARY OF THE KEY CHANGES
Business Tax Changes
- Corporate Tax Rate. The corporate tax rate will be adjusted to 21%, with certain limitations.
- Pass-Through Entity Taxation. Owners of pass through entities such as S-corporations and partnerships currently pay tax on company earnings based on their personal tax rates. This means the highest earners currently pay a top rate of 39.6%. In addition to the reduced tax brackets discussed below, the bill creates a 20% deduction for pass-through income with certain limitations.
- Immediate Expensing. The bill permits the full expensing of certain capital investments for the next five years and then phases out the benefit 20% each year over the following five years.
Individual Tax Changes
- New Tax Brackets. The proposed brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The last bracket, down from 39.6%, will be for single taxpayers with income above $500,000 and couples with income above $600,000.
- Standard Deduction. The standard deduction will increase to $12,000 for individuals and $24,000 for couples.
- Expansion of Child Tax Credit. This credit will be increased from its current value of $1,000 to $2,000 per child with $1,400 of this amount being refundable.
- Mortgage Interest Deduction. Interest on mortgages up to $750,000 is deductible in the new legislation, which is a reduction from the current $1M cap.
- Estate Tax Repeal. While there won’t be a repeal of the estate tax, the exemption is increasing from $5.6M to $11.2M per individual that may be passed on without federal taxation.
If you would like to learn more about these proposed changes before the end of year, or if you have questions about tax planning in light of the tax bill, Smith Schafer can help. For additional information click here to contact us. We look forward to speaking with you soon.